Non Executive Directors - "Likened to the Baubles on a Christmas Tree"

Written by Nigel Davies on 19 December 2014

We are pleased to include a guest blog from Frank Lewis, an experienced Chairman and Non Executive Director with a deep track record spanning 25 years as either Finance Director, CEO, Non Exec Director or Chairman within a wide variety of sectors and cultures. Frank is a successful entrepreneur who co-founded and grew South Africa's largest retail computer chain which he listed on the Johannesburg stock exchange.

He now succesfully manages a diverse portfolio of Non Exec Directorships which include rapidly expanding AIM quoted SMEs in the UK along with overseas ventures. He is actively involved in mentoring CEOs and SME Boards and working with entrepreneurs to grow their businesses.

Frank is an example of the type of Interim Chairmen and Non Executive Directors who Wyn River can access for our clients, especially but not exclusively those with operations in Africa. We hope you enjoy his assessment of the role of NEDs, and the personal attributes that are needed to fulfil the function successfully.

"The late “Tiny” Rowland once described NEDs as “baubles on a christmas tree” which revealed how little dominant chief executives expected to be questioned by fellow directors.

Since the glory days of the maverick empire of Mr Rowland between the 1960s and the 1990s, it would seem that nothing much has changed. He considered that many members around the board table were like baubles, doing nothing more than decorating the table. A non-executive director who challenged a powerful CEO such as Mr Rowland was not expected to remain a non-executive for very long.

This story is not over. The test for non-executive or independent directors is to prove wrong Lord (Michael) Grade, who once observed with characteristic wit: “A non-executive is a bit like the bidet in your bathroom: nobody is quite sure what they are used for, but they add a touch of class.”

The commitment and engagement required, especially in big businesses, is vastly greater than some might imagine. You are not there to be a bauble, have lunch, make polite conversation and pick up a fee. There is a job to do: a vital and challenging one.

I am sure most NEDs have come across many boards who are not tolerant of challenge and if someone speaks up or asks too many questions, they are branded as part of the “awkward squad”.

Lord Walker in a speech once said:- “The ability of NEDs to stand up to executive management is more important than the qualifications those directors hold.”

While there has been a whole lot of discussion about the need for NEDs with relevant experience, that knowledge is little more than useless if it is not accompanied by a willingness to challenge the executives.

In my opinion, my definition of a good NED is that he/she should:

ensure the business is well run, not run the business

have good interpersonal skills and the ability to manage conflict

have sound judgment

be able to influence through clear communication

have integrity

have the conviction to say things that need saying and, as a last resort, vote with his/her feet

be commercially astute

not get entangled in the day-to-day operations

The following are important responsibilities of an NED:

CHALLENGE THE MD AND EXECUTIVE BOARD:

By asking apparently simple questions about the business, the NED can greatly help an executive team to re-focus on the important rather than the urgent. Also to challenge commercial ideas such as “We have always done it that way”.

PROVIDE KNOWLEDGE, INSIGHT AND EXPERIENCE:

General business wisdom and experience gained from a variety of environments has huge value as business people often learn best from the experience of others.

RAISING GOVERNANCE:

A good NED should help to raise the standards of corporate governance within a company. This helps to ensure that executives understand their obligations in this respect and thus comply with the Code.

ADVISE ON STRATEGY:

A business without a strategy is a business without a sense of direction or purpose. NEDs can assist the executive team in articulating the strategy. Therefore, NEDs must have good interpersonal skills and sound judgement.

CHALLENGE BUSINESS PLANS:

Executives can often produce business plans where their goals are comfortable rather than stretching. NEDS can push, interrogate and raise the performance bar. They can also challenge where they believe ambitions are simply unrealistic. They provide a commercial reality check.

MENTOR:

One of the most important roles of a NED, especially for SMEs, is to act as a mentor to the executive board and coaching of directors in governance, people management etc.

ACTING AS A SOUNDING BOARD:

NEDs have an invaluable role to play when a company is considering decisions such as acquisitions and disposals of businesses.

The above roles do, of course, have to be read in the context of any NED’s statutory duty to promote the success of the company for the benefit of its members as a whole under the Companies Act 2006 – which he shares with his co-directors.

In addition, however, the NED can act as the impartial “honest broker”, helping to make well thought out decisions where the heart wants to rule the head in some cases!

New legislation under the Companies Act has ratcheted up the threat of legal action. Activist shareholders are all too ready to put NEDs under fire. This has made the role of the NED even more crucial and onerous. The NED sits on an equal footing, with the same legal obligations as those who run the company on a full-time basis. He/she should ensure that the executive team fully understands the issues of the day and that they are complying with the board’s decision at all times. The focus of NEDs should also be on the various risks facing the business, including:

Internal controls

Cash management/receivables

Gearing of balance sheet

Ensuring bank covenants are not breached

Keeping customs and protecting markets

Retaining key personnel

Litigation

Environmental

Health and safety etc

Cyber risk

The reputation

In conclusion, NEDs are working harder than ever. The UK Corporate Governance Code has made the job even more onerous, resulting in an imbalance between risk and reward (especially in SMEs)."